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3 • 2024

The Large Operating Company Exemption to FinCEN Beneficial Ownership Information Reporting

Now that the Beneficial Ownership Information Reporting Requirements final rule (“BOI Reporting Rule”) adopted on September 30, 2022 by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury has finally taken effect,[1] questions continue to pile up about the implementation of the BOI Reporting Rule and how it will apply (or not apply) to various entities and individuals. In this article, we discuss the exemption from the beneficial ownership information (“BOI”) reporting requirements for large operating companies.

The BOI Reporting Rule is aimed at requiring small businesses to provide information about their beneficial owners and their incorporators to FinCEN to be maintained in a central federal repository as a tool to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illegal activity.[2] The BOI Reporting Rule was adopted under the authority of the Corporate Transparency Act (“CTA”) passed by Congress as part of the National Defense Authorization Act for Fiscal Year 2021.[3] The thinking behind the CTA and the BOI Reporting Rule is that most U.S. jurisdictions supposedly do not currently require information about the beneficial owners of small business entities such as closely held corporations and limited liability companies, thereby permitting criminal actors to hide behind such entities when dealing with legitimate financial institutions and others.[4] The CTA and the BOI Reporting Rule thus require “reporting companies” to provide specified information about their beneficial owners and incorporators to FinCEN.[5]

Because the idea is to obtain information about the many millions of small businesses that do not already report their BOI, the CTA exempted from the definition of “reporting company” 23 specific types of entities, many of which are already subject to substantial federal and/or state regulation or already have to provide their BOI to a governmental authority.[6] The exemption we are interested in today is for what FinCEN refers to as “large operating companies.”

Under the CTA, an entity falls into this category, and is therefore exempt from reporting, if it: (1) “employs more than 20 employees on a full-time basis in the United States”; (2) “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate,” including the receipts or sales of other entities owned by the entity and through which the entity operates; and (3) “has an operating presence at a physical office within the United States.”[7] The BOI Reporting Rule puts in place clarifications of each of these three statutory elements.

First, with regard to who counts as full-time employees, the BOI Reporting Rule borrows “well-known and well-established general business tax principles” from the Internal Revenue Service rules for determining status as a full-time employee.[8] Second, concerning what counts as gross receipts or sales, the BOI Reporting Rule focuses on U.S. sources and again uses “well-known concepts in U.S. tax practice” by referring to amounts reported on various IRS tax forms.[9] Third, the BOI Reporting Rule specifically defines the term “operating presence at a physical office within the United States” to mean that “an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.”[10] Under this definition, a large operating company may operate exclusively out of a property used as someone’s residence, though FinCEN believes such entities are likely to be few given the “size necessary to take advantage of this exemption.”[11]

Putting together the requirements from the CTA and the BOI Reporting Rule, an entity qualifies for the large operating company exemption if all six of the following criteria apply:

  1. The entity employs more than 20 full-time employees, when applying the meaning of full-time employee in the IRS regulations. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours per week;
  2. More than 20 of the entity’s full-time employees are employed in the United States (including territories and insular possessions);
  3. The entity has an operating presence at a physical office within the United States, as discussed above;
  4. The entity filed a Federal income tax return or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales;
  5. The entity reported this amount as gross receipts or sales (net of returns and allowances) on the entity’s applicable IRS form; and
  6. When gross receipts or sales from sources outside the United States are excluded, the amount remains greater than $5 million.[12]

FinCEN has indicated that it will consider issuing additional guidance or FAQs to clarify specific factual circumstances that arise in the course of evaluating the applicability of the large operating company exemption.[13]

How many companies will qualify for this exemption? FinCEN estimates, based on available tax information, that about 320,000 entities will qualify for the large operating company exemption.[14] By contrast, FinCEN estimates that there will be approximately 32.6 million existing reporting companies and 5 million reporting companies formed each year that must provide their BOI to FinCEN under the BOI Reporting Rule.[15]

[1] For a general description of the BOI Reporting Rule, see eMinutes, “FinCEN Reporting — Yes It Is Really Happening” (Feb. 23, 2023). The BOI Reporting Rule is codified at 31 C.F.R. § 1010.380.

[2] See FinCEN, Beneficial Ownership Information Reporting Requirements, 87 FR 59,498 (Sept. 30, 2022) [hereinafter referred to as the “Adopting Release”].

[3] See 31 U.S.C. § 5336.

[4] See Adopting Release, supra note 2, 87 FR at 59,498 to 59,499.

[5] For a general description of what information has to be reported to FinCEN and when, see eMinutes, “FinCen Deadline Extended for New Companies to Report” (Sept. 27, 2023); “FinCEN Reporting — Yes It Is Really Happening” (Feb. 23, 2023).

[6] See 31 U.S.C. § 5336(a)(11)(B)(i)-(xxiii); Adopting Release, supra note 2, 87 FR at 59,539. The full list of exempt entities includes “securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other entities registered pursuant to the Securities Exchange Act of 1934, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, entities registered pursuant to the Commodity Exchange Act, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities, and inactive businesses.” Adopting Release, supra note 2, 87 FR at 59,539 n. 186.

[7] 31 U.S.C. § 5336(a)(11)(B)(xxi).

[8] Adopting Release, supra note 2, 87 FR at 59,543; see also 31 C.F.R. § 1010.380(c)(2)(xxi)(A) (incorporating 26 C.F.R. § 54.4980H-3). The IRS regulations provide two methods for determining full-time employee status: the monthly measurement method and the look-back measurement method. 26 C.F.R. § 54.4980H-3.

[9] Adopting Release, supra note 2, 87 FR at 59,542; see also 31 C.F.R. § 1010.380(c)(2)(xxi)(C) (referring to gross receipts or sales reported on the entity’s IRS Form 1120, consolidated Form 1120, Form 1120-S, Form 1065, or other applicable IRS form).

[10] 31 C.F.R. § 1010.380(f)(6).

[11] Adopting Release, supra note 2, 87 FR at 59,543.

[12] See FinCEN, Small Entity Compliance Guide v. 1.1, at 12 (Dec. 2023).

[13] See Adopting Release, supra note 2, 87 FR at 59,543.

[14] See id. at 59,567.

[15] See id. at 59,584.